Ether.fi and cargo cult crypto by Mike Silagadze

Hello everyone. Uh my name is Mike Siligadza. I'm the founder and CEO of Etherfi. I'm excited to be chatting with you guys today. Um so actually this speaking slot was originally called uh I think rebuilding the uh crypto economy.

Uh I was swatted in uh uh recently. So my talk is totally not that. So if that's what you were looking to hear, I apologize. Um but what I'll do is I'll talk to you about uh Etherfi a little bit and then the rest of my talk is called Cargo Cult Crypto which should be pretty interesting. Uh okay.

So first let's talk a little bit about EtherFi. I'll just spend a minute or two uh on that. So Etherfi is a new protocol. We're we're launching actually at ETH Denver uh this coming week. So we're very excited uh for that.

And it is a fundamentally new type of liquid staking protocol. Uh I probably don't need to do this with this audience, but maybe show of hands. Uh how many people know what liquid staking is pretty much everybody? Okay, great. Um All right.

So then I'll just talk uh about what makes Etherfy unique and why we're we're interesting. Um there's two things that are interesting about Etherfy and what makes it different from other liquid staking protocols. The first is that EtherFI is the only one where the staker actually controls their keys. With every other uh liquid staking protocol, you deposit your ETH uh and then the node operator generates the keys uh which introduces a bunch of counterparty risk that I'll talk about later. Um and with Etherfy, the staker actually generates the keys and then delegates the the node operation, which I think is a really important step in terms of decentralization.

The second thing that's interesting about EtherFI is that uh we mint an NFT representation of every validator that's spun up as part of our protocol. And that's really cool because it allows us to store metadata related to related to the validator. So things like uh what client it's running, uh what geography it's based in, what the node operator uh is, and uh what services it might be running. And that's really interesting because it allows us to build basically a composable layer on top of which you can build stuff uh on our staking protocol. That's really uh interesting and exciting.

And if you want to learn more uh happy to ask to answer more questions in Q&A or or chat with us afterwards. Uh the other thing and you you heard it here first. Uh we actually just raised the seed round. Uh we're launching the alpha or I guess the the phase one of our protocol on Tuesday. Uh the announcement hasn't actually gone out yet.

So you guys heard it here first. Very exciting. We have some great uh investors that uh uh participate in the round. Uh really great VCs uh and lots of crypto OGs like Arthur Hayes and other cool people. So uh so that's awesome.

So look out for the announcement on uh on Tuesday. Okay. So now I'll talk uh about uh uh Cargo Cult crypto. Um again, show of hands. How many people have read the Richard Fineman talk called Cargo Cult Science?

All right, most of you haven't. Okay, so I'll explain that a little bit and then get into uh the crypto side of it. Um it's a really amazing talk, probably one of my favorites. Um it's a really touching tribute to scientific integrity. So if you haven't read it, definitely uh uh recommend it.

Um the context for that that talk is this this idea of cargo cults. Uh what cargo cults are, they emerge out of the World War II uh US military bases in the various sort of Pacific islands. The US uh during World War II would have these bases and on these islands they would have an airirstrip. On this airirstrip uh planes would land and would bring all kinds of grid cargo which the troops would of course trade with the the local populations and the local native indigenous populations hadn't seen most of them hadn't been exposed to technology before. So this was like new and interesting to them.

They got all this good stuff that they previously didn't have access to. And then when the war ended, really weird and interesting things started to emerge, which is uh religions or cults started to develop around bringing the cargo back, bringing the planes back because the US had left after the the war. Uh and so these these religions developed where they would build these uh you know sort of mock air strips with fires lit along the side. these these tribes um that represented like runway lights. They would build like you know straw satellite dishes.

They would have like you know headgear made out of wood that sort of looked like uh the uh you know what they saw the the Americans doing when they were there. And they were following these rituals trying to uh bring the planes back. Like they would like march back and forth and like do this stuff that they saw the Americans doing. Now, if you put yourself in the position of someone trying to explain to these folks, uh, who I'm sure were well-meaning, you know, saying, "Okay, here's how you actually here's what you're missing. Uh, here's what you need to do to bring like some economic growth so that the planes and cargo actually come back."

It's not something simple, right? It's not just like, "Oh, you need to make the shape of your satellite dish a little better." Like, it's it's it's kind of like if you squint from a distance, the form looks right. they're kind of doing everything right but something fundamental uh and is missing and this becomes kind of an analogy and Feman uses this analogy in his uh in his talk uh to the social sciences where like okay they're following all the form of science they're publishing papers there's peer review they there's all kinds of math in the in the papers but like you know the experiments don't replicate we're not any better at any of the the subjects that uh you know that they studyed and so on and so forth. So there kind of there's something missing even though the form looks perfect.

And once you have this sort of mental model, you kind of start seeing cargo cults everywhere. At least I do. Maybe that's a weird thing with me. Um and so I want to talk about crypto cargo cults. And I'll talk about three particular examples um that will probably piss some people off which which is I think is good.

Hopefully create some good debate. Um, but I think there there examples of cargo cults where the superficial elements of crypto are being followed, but the the core element is kind of missing. Um, and I think everybody kind of has a story of how they got into crypto. Like, you know, I I read about it on Hacker News in like 2010 and started messing around with it super early. Um, and the thing that got excited that got me excited about crypto was this idea of a stateless money.

And I'm preaching to the choir here, right? um in that uh it promised this this ability to put you know further check on government so that they couldn't inflate away your you know your wealth and prosecute wars that nobody wanted and all kinds of good stuff and this you know full separation of government and economics like that's the that's what excited to me uh excited me about crypto and so I'll talk about three examples of things that as I said are kind of cargo culture so I can probably I probably just put this slide up and not really say much but uh uh I'll talk uh here. I'll start with what I like about Binance Smart Chain. How's that? Um I think it was designed, maybe I'm being too optimistic, by well-meaning people that were trying to solve real problems with Ethereum.

I mean, most of you, I'm sure, know that for, you know, long periods of time, uh transactions of on Ethereum were like, I don't know, hundreds of dollars in some cases, and they would take minutes or sometimes hours to go through. um uh you know the UX was like really terrible in a lot of cases. Um and you know, Binance said, "Well, look, let's just we'll we'll launch our own smart chain. We'll make it super fast. Uh we'll increase the block size.

We'll we'll like we'll just have 20 validators, 21 validators. Uh they're totally super independent. Um and uh and that'll make it uh you know, that'll solve all these problems. And arguably, you can say they they were able to achieve some of that. I mean, lots of DGens uh came into crypto because of Binance Smart Chain.

You can make the argument that was a positive thing. It brought a lot of users. I wouldn't, but you know, you can make that argument. Um, but if you look at it, there's there's a lot of uh there's these superficial elements of crypto, right? There's a blockchain.

Like there's legit a blockchain there, right? Uh there's validators and they're like they're totally independent, right? There's like independent validators. Uh it there's smart contracts. Like come on, what else do you want?

It's totally crypto except it's not. It has nothing to do with crypto, right? Um it follows all these superficial forms of crypto, but it's not it doesn't follow any of the principles. Okay, let's move on to the next example. Uh this one probably will hit a little closer to home.

Um if you look at like Ethereum nodes and where they're based, the first thing you'll notice is that about half of them are based in the US, which is a little bit questionable, let's say. uh and introduces some risk. But the real issue is when you dig down and like actually go one step further, you realize it's not just in the US. Most of them are based in Virginia, like 20 miles stylistically, this is like kind of ridiculous. 20 miles from the White House and like the CIA headquarters.

I know they could be anywhere. It doesn't matter. But you have one data center that has like almost a third of Ethereum nodes. like one building across the street from freaking Joe Biden's house is like where where like a third of Ethereum lives. um this is like this is problematic and again like Binance you look at it and you say well look there there's good reasons for it right if you're doing MEV or you're doing like trading on you know on chain and trying to do all kinds of you know fun stuff there's a lot of value in being in the same data center as a lot of other nodes like I did that lots I'm sure lots of people here did that kind of stuff you want to place your node where it can peer with lots of other nodes so you get quicker access to the memp pool you can get transactions in through through faster lots of good stuff from doing that.

But, you know, I'm sure all of us felt, I know I did, very smug when Hner shut off crypto and like a third of Solana went offline. And we were, you felt like, haha, those, you know, SQL Lana, haha, crypto, Twitter, real, you know, lots of great jokes and frankly valid, but like the same thing could happen like it's one building that holds a pretty big chunk. So, maybe we shouldn't feel so smug. Um but to to end on a positive note uh with this um uh look there's lots of people that are working on this stuff and I think one of the most important things that we could do is to make solo staking easier. One of the things that we're we're trying to do um so that we don't have you know nodes in the same place that maybe there's more people not just in the US uh that have a server you know under their desk or whatever that they're running validators which is a lot harder to to censor.

Okay, now we're really going to get into it. This one's definitely going to piss some people off. Um, if you look at um the distribution of ETH staked uh out there in different stakers, the top three uh staking services control about half, which is problematic uh in itself and hopefully that that'll get better and I think it will post post Shanghai. But then if you sort of dig further and look at Lido, which is by far the biggest one, you know, like five million almost 5 million ETH staked, uh it actually gets a little bit scary uh once you uh when you really get into it. And sim similar to BSC, I'll start with the positive stuff because I actually I think Lido is a great team and they're good actors uh in the space and they deserve a ton of credit, right?

Like Lido basically I think proved out liquid staking derivatives. There was a lot of question about whether you know LSDs even made sense, whether they were going to work, whether they could be integrated safely into the rest of DeFi. So, a huge amount of credit for that. They launched first and they're building like really great stuff and they're making good strides forward. So, uh like the latest stuff they released with the staking router, really awesome.

So, uh that team is great and so I I want to say that before I start bitching about it. Um uh because I really am genuinely a big fan of them. Um so to understand kind of the issues the the big issues that exist with uh you know not just with LIDO with a lot of staking protocols you kind of have to dig one step deeper into how ETH staking works um which is different than the way other proof ofstake chains work. Uh with ETH staking when you stake uh all you need to do is just deposit your ETH. You generate your credentials and then deposit your ETH into the beacon chain deposit contract.

But when you unstake, you actually need to do something different. You need to do an exit command on the beacon chain and you need the validator key in order to be able to do that. So it's not enough to just have the withdrawal credentials. You have to actually have the validator key in order to get be able to get your ETH back. So okay, what's what's the problem?

Well, the problem is in most uh I think all of the existing staking protocols um only the node operator has the validator key. Uh so what that means is when uh what what it means is basically there is no uh redemption mechanism that is possible to implement via smart contracts. It is basically a voluntary process. I want to reiterate that uh when you show up with your ST post Shanghai and you queue up and you get you know you uh uh you want to redeem it for ETH it is a voluntary process for the node operator to then give you back the ETH. there is no mechanism that actually forces them to give you back the ETH.

Um that's a problem, right? Like there's a bunch of node operators that are based in the US. A lot of the nodes are based in the US. We just saw what happened like a week ago, two weeks ago. Um uh in terms of the SEC issuing a summon to Kraken saying, "Hey, give us KYC all your US customers uh and give us the their information for tax purposes."

Like that could get really problematic, right? And crypto is a market that's uh not known for an eventempered response. Um uh so you can imagine given this sort of voluntary redemption process any number of scenarios that could end uh really badly. Um you know a bunch of node operators could get hacked and held for ransom if their validator keys are exposed. Uh the SEC could just say issue one angry letter to I don't know Block Damon for example and say hey you can't release the ETH until you KYC everyone on Lido.

Uh so lots of bad things can happen. Now again I'll go back to these problems are solvable and there's lots of people that are working on solving these uh these problems. Uh again the staking router uh that Lido is going to be releasing uh is awesome and uh serves to potentially diversify the pool of uh uh stake node operators uh which is great would would solve this problem. They're also working on DBT, distributed validator technology implementation, which would I think if they fully move to that that actually fully solves this problem, which is which is great. So people are aware of this.

There's also mechanisms like upgrades to Ethereum that are in discussion that could potentially address this. So people are aware of this. People are working on it, but for God's sake, there's like$8 billion in LTO. we shouldn't just ape everything into a protocol uh that could blow up the entire ecosystem uh if a certain number of things kind of went particularly bad. Um I guess so what I'm asking for is more like temperance and I don't know even evenhandedness uh with this stuff.

Um cuz decentralization is one of these things that doesn't matter 99% of the time. Like probably more 99.9% of the time decentralization is not something you should really uh you know give a crap about. Uh until it does and then suddenly it's literally the only thing that matters. Um I'm sure probably just statistically a lot of people here were impacted by FDX.

I'm sure a lot of people when that happened suddenly really wish they had their keys and could just get their their tokens out. Um, so decentralization matters and it's important to stick to uh stick to the core principles rather than just taking shortcuts and and aping into stuff which is what uh one of the reasons that we're building Ether and we're we're so excited about it. Um uh so I mentioned we're launching at ETH Denver. One of the things we're doing is we're going to have a launch party uh on March 3rd this Friday at uh 6 p.m.

Uh which is going to be really awesome and fun. Um it's at Lefthand Rhino. I think it's like a 5minute walk from the from the venue. Uh so feel free to register uh at our Eventbrite and uh hopefully we'll see you there. I think I guess I have a couple minutes so happy to answer Q&A about uh other things I can complain about or uh or Ether specifically.

All right, great. Well, thanks everyone. Really appreciate it and see you later.